Self-Employment Tax

When you work as a W-2 employee, your employer pays half of your Social Security and Medicare taxes and you pay the other half — it's automatically deducted from your paycheck. As a contractor, you're both the employer and the employee, so you pay the full 15.3% yourself. That's the self-employment tax.

The breakdown is 12.4% for Social Security (on net earnings up to the annual wage base — $168,600 in 2025) and 2.9% for Medicare (on all net earnings, no cap). If your net self-employment income exceeds $200,000 ($250,000 if married filing jointly), you'll also pay an additional 0.9% Medicare surtax on the amount above that threshold.

The good news: you get to deduct the employer-equivalent portion (half of your self-employment tax) when calculating your adjusted gross income. This doesn't reduce your self-employment tax itself, but it lowers your income tax. You calculate self-employment tax on Schedule SE and file it with your annual return.

Self-employment tax is often the biggest tax surprise for new contractors. You might budget for income tax, but forget about this additional 15.3% on top of it. On $100,000 in net income, that's roughly $14,130 in self-employment tax alone — before you even get to federal and state income taxes.

This is exactly why quarterly estimated tax payments exist. If you don't plan ahead, you'll owe a massive lump sum in April plus potential underpayment penalties. Smart contractors set aside 25-30% of every payment they receive for taxes.